International Journal of Science and Research (IJSR)

ISSN (Online): 2319-7064

Impact Factor (2012): 3.358

Influence of Credit Risk Management Practices on

Loan Performance of Microfinance Institutions in
Baringo County
Kurui Samuel Kiplimo1*, Dr. Aquilars M. Kalio2

P.O Box 46-20105 Mogotio Kenya

kuruikiplimo@gmail.com

Abstract: The purpose of this study was to investigate the effect of credit risk management practices on loan performance in MFIs in
Baringo County. The study employed a descriptive research design and was based on a survey of MFIs in Baringo County. The target
population in this study was managers and credit officers in MFIs in Baringo County. Census sampling technique was used because all
branch managers and credit officers were directly targeted in this study. Questionnaire was used to collect data. Descriptive and
inferential statistics were used in data analysis. Descriptive statistics including percentages and frequencies while inferential statistics
used included Pearson correlation and regression analysis. The study concluded that there was a strong relationship between client
appraisals and loan performance in MFIs. The study revealed that an increase in client appraisal led to an increase in loan performance
in MFIs in Baringo County. Thus the study concludes that credit risk management practices significantly influenced loan performance
of MFIs in Baringo County. The study recommends adoption of a more stringent policy on credit risk management practices in MFIs in
Baringo County so as to improve their financial performance.

Keywords: Client Appraisal, Credit Management practices, Credit Risk Control, Loan Performance, Microfinance Institutions,
Microfinance

1. Introduction
The concept of credit has a long history and can be traced
back to ancient times. However, it was not until after the
Second World War when it largely begun to be
appreciated in Europe (Kiiru, 2004). In the United States
of America (USA) banks extended credit to customers
with high interest rates which sometimes discouraged
borrowers. Thus the concept of credit was not popular in
USA until the economic boom of 1885 when banks had
excess liquidity and wanted to lend the excess cash
(Ditcher, 2003). In Africa the concept of credit was largely
appreciated in the 1950’s when most banks started opening
the credit sections to extend loans to white settlers. In
Kenya credit was initially given to the rich and big
companies and was not popular to the poor. In 1990s loans
extended to customers failed to perform well thus
necessitating the need for intervention. Mechanisms to
evaluate for the evaluation of customer’s ability to repay
the loan were considered, but this didn’t work well as loan
defaults continued unabated (Modoc, 1999). This has been
the case not only in MFIs but also in formal banking
institutions. In microfinance institutions (MFIs) the
concept of credit management became widely appreciated
in the late 90s, but again this did not stop loan defaults to
this date (Modoc, 1999).
Consequently research studies have suggested that in order
to minimize exposure to bad debt, financial institutions
must have greater insight into customer financial strength,
credit score history and changing payment patterns. The
ability to attract customers hinges on the ability to quickly
and easily make well-informed credit decisions and set
appropriate lines of credit. However, a firm’s credit policy
is greatly influenced by economic conditions (Pandey,
2008). As economic conditions change, the credit policy of
the firm may also change. Therefore MFIs must develop a
credit policy to govern their credit management operations
(Pandey, 2008) and since MFIs generate their revenue
from credit extended to low income individuals in the form
of interest charged on the funds granted (Kariuki, 2010)
the loan repayments may be uncertain. The success of
lending out credit depends on the methodology applied to
evaluate and to award the credit (Ditcher, 2003) and
therefore the credit decision should be based on a thorough
evaluation of the risk conditions of the lending and the
characteristics of the borrower. Numerous approaches have
been developed in client appraisal process by financial
institutions. They range from relatively simple methods,
such as the use of subjective or informal approaches, to
fairly complex ones, such as the use of computerized
simulation models and Credit Reference Bureau (Horne,
2007). Many lending decisions by MFIs are frequently
based on their subjective feelings about the risk in relation
to expected repayment by the borrower. MFIs commonly
use this approach because it is both simple and
inexpensive. However the concepts of 5C for credit
appraisal pioneered by Edward (1997) has gained currency
in MFIs. These elements are character, capacity, collateral,
capital and condition (Edward, 1997; Orua, 2009).
Microfinance deals with the lending of small amount of
capital to poor entrepreneurs in order to create a
mechanism to alleviate poverty by providing the poor and
destitute with resources that are available to the wealthy at
a small scale. According to Anyanwu (2004), MFIs
provide not only capital to the poor, but also combat
poverty at an individual level. Thus such institutions
should continuously provide financial services to the poor.
In Africa and other developing regions, MFIs are the main
source of funding for micro enterprises (Anyanwu, 2004).
In Kenya the gap filled by MFIs has become part of the
formal financial system and MFIs need to access capital

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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
market to fund their lending portfolios, in order to allow
them to dramatically increase the number of poor people
they can reach. In Kenya micro financing is offered by
many big and small micro financial institutions such as
Kenya Women Finance Trust (KWFT), Faulu Kenya,
Rafiki, Rahisi business solutions among others. These
micro financial institutions have national, regional and
local presence in Baringo County.
Credit Risk Management and Loan Performance in
Microfinance Institutions
Loan portfolio refers to the total amount of money given
out in different loan products to different types of
borrowers. This may be comprised of salary loans, group
guaranteed loans, individual loans and corporate loans.
Loan portfolio looks at the number of clients with loans
and the total amount in loans (Wester, 1993). Survival of
most MFIs depends entirely on successful lending program
that revolves on funds and loan repayments made to them
by the clients (Sindani, 2012). This requires a restrictive
credit control system to be put in place so as to restrain
from unnecessary lending thus, improving on profitability
of micro finance institutions (Kakuru, 2000). Credit
management is the executive responsibility of determining
customer’s credit ratings as part of the credit control
function.
Tucker and Miles (2004) studied three data series for the
period between March 1999 and March 2001 and found
that self-sufficient MFIs are profitable and perform better
on return on equity (ROE) and return on assets (ROA). In
order to optimize their performance, MFIs are seeking to
become more commercially oriented and stress more on
improving their profitability. Loan portfolio in MFIs is the
most important since portfolio quality reflects the risk of
loan delinquency and determines future revenues and
ability to increase outreach and serve existing customers.
Portfolio quality is measured as portfolio at risk over 30
days. How best a loan portfolio is performing is looked at
in terms of profitability and rate of return on different loan
products. This is a function of the number of the loans and
the cost of administering these loans (Indjeikein, 1997). In
Baringo County the extent of poverty is alarming.
However, the need for microcredit has been noted and
several MFIs have opened branches in the area.
Consequently studies were required to establish the extent
to which credit risk management practices may influence
loan performance and minimize the risk of credit default in
MFIs in the area.
Statement of the Problem
The financial success of MFIs depends on the
effectiveness of their credit management systems because
these institutions generate most of their income from
interest earned on loans extended to small and medium
entrepreneurs. The Central Bank Annual Supervision
Report, 2010 indicates that high incidence of credit default
has been reflected in the rising levels of non- performing
loans by MFIs in the last 10 years. This situation has
adversely impacted on loan performance and profitability
of MFIs. This situation is not different from MFIs in
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Baringo County. This trend not only threatens the viability
and sustainability of the MFIs but also hinders the
provision of credit to the rural unbanked population and
bridge the financing gap in the mainstream financial
sector. A study on microfinance credit risk management
practices and loan recovery systems is of considerable
interest by many researchers particularly under the new
constitutional dispensation. This is because some MFIs
have collapsed while others are facing serious default or
low loan uptake (Migiri, 2012). However, most studies
undertaken in the past few years have focused mainly on
credit models used by deposit taking microfinance
institutions (DTM) and their impact on profitability
(Migiri, 2012). Absence of empirical studies on the role of
credit risk management practices on the performance of
MFIs was the principal motivation behind this study which
sought to find out the influence of credit risk management
practices on loan performance in microfinance institutions
in Baringo County.
Objective of the Study
To determine the effect of client appraisal on loan
performance of microfinance institutions in Baringo
County.
Research Hypotheses
H01: There is no statistically significant relationship
between client appraisal and loan performance of
microfinance institutions in Baringo County.
Significance of the Study
The outcome of this study is expected to benefit many
parties. The microfinance sector may benefit from the
study because it may highlight the problems microfinance
face due to non performing loans. The results of the study
may also help other researchers who may be interested in
doing further research in the same area of study. The
findings of the study may also benefit students pursuing
financial management courses. The study also adds to the
body of knowledge in the finance discipline by bridging
gaps in credit risk management practices. This study may
make several contributions to both knowledge building
and practice improvement in credit risk management
practices and financial performance.
Scope of the Study
The study was carried out at Baringo County and covered
a period between August and October, 2014. The study
was conducted among 7 microfinance institutions found in
Baringo County. The area of the study was on credit risk
management practices in MFIs in Baringo County. The
area was chosen because of its proximity to the researcher
and accessibility of the MFIs within the study area. The
study was conducted within the proposed budgetary plan
and time frame.
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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
2. Literature Review
Theoretical Review
The 5 C’s Model of Client Appraisal
Microfinance institutions may use the 5Cs model of credit
management to evaluate a customer as a potential
borrower (Abedi, 2000). The 5Cs are character, capacity,
collateral, capital and condition. Character basically is a
tool that provides weighting values for various
characteristics of a loan applicant and the total weighted
score of the applicant is used to estimate his credit
worthiness (Myers, 2005). The factors that influence a
client can be categorized into personal, cultural, social and
economic factors (Ouma, 2008). The psychological factor
is based on a man’s inner worth rather than on his tangible
evidences of accomplishment. MFIs may consider this
factor by observing and learning about the individual. In
most cases it is not considered on first application of credit
by an applicant but from the second time.
Under social factors, lifestyle is the way a person lives.
This includes patterns of social relations such as
membership groups, consumption and entertainment. A
lifestyle typically also reflects an individual's attitudes,
values or worldview. Reference groups in most cases have
indirect influence on a person’s credibility. Through group
guarantors MFIs try to identify the reference groups of
their target as they influence a client’s credibility. Personal
factors include age, life cycle stage, occupation, income or
economic situation, personality and self concept. Under
life cycle stage for example older families with mature
children are not likely to default since it’s easier to attach
collateral on their assets since they are settled unlike the
unsettled young couples. The MFIs will consider the cash
flow from the business, the timing of the repayment, and
the successful repayment of the loan. Cash flow helps the
MFIs to determine if the borrower has the ability to repay
the debt. The analysis of cash flow can be very technical.
It may include more than simply comparing income and
expenses. MFIs determine cash flow by examining
existing cash flow statements and reasonable projections
for the future.
Collateral is any asset that customers have to pledge
against debt (Modoc, 1999). Collateral represents assets
that the company pledges as alternative repayment source
of loan. Most collateral is in form of hard assets such as
real estate and office or manufacturing equipment.
Alternatively accounts receivable and inventory can be
pledged as collateral. MFIs prefer collateral that has
duration closely matched to the short term loan. According
to Wester (1993) capital is measured by the general
financial position of the borrower as indicated by a
financial ratio analysis, with special emphasis on tangible
net worth of the borrower’s business. Thus, capital is the
money a borrower has personally invested in the business
and is an indication of how much the borrower has at risk
should the business fail. Condition refers to the borrower’s
sensitivity to external forces such as interest rates, inflation
rates, business cycles as well as competitive pressures. The
conditions focus on the borrower’s vulnerability.
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Client Appraisal and Loan Performance
Client appraisal can be used to enhance loan performance.
The first step in limiting credit risk involves screening
clients to ensure that they have the willingness and ability
to repay a loan. MFIs use the 5Cs model of credit to
evaluate a customer as a potential borrower (Abedi, 2000).
The 5Cs help MFIs to increase loan performance, as they
get to know their customers better. The 5Cs need to be
included in the credit scoring model. The credit scoring
model is a classification procedure in which data collected
from application forms for new or extended credit line are
used to assign credit applicants to good or bad credit risk
classes (Constantinescu, 2010). Inkumbi (2009) notes that
capital and collateral are the major stumbling blocks for
entrepreneurs trying to access capital. This is especially
true for young entrepreneurs or entrepreneurs with no
money to invest as equity; or with no assets they can offer
as security for a loan. Any effort to improve access to
finance has to address the challenges related to access to
capital and collateral. One way to guarantee the recovery
of loaned money is to take some sort of collateral on a
loan. This is a straightforward way of dealing with the
aspect of securing depositors funds. However, customer
evaluation has been considered appropriate in the context
of MFIs. Campsey and Brigham (1995) propounded that
the evaluation of an individual should involve; gathering
of relevant information on the applicant, analyzing the
information to determine credit worthiness and making the
decision to extend credit and to what tune.
Empirical Review
Several studies have been done in regard to credit risk
management on loan portfolio. Pyle (1997) in his study on
credit risk management held that financial institutions
needed to meet forthcoming regulatory requirements for
risk measurement and capital. However, it is a serious
error to think that meeting regulatory requirements is the
sole or even the most important reason for establishing a
sound, scientific risk management system. Managers need
reliable risk measures to direct capital to activities with the
best risk/reward ratios. They need the estimate of the size
of potential losses to stay within limits imposed by readily
available liquidity, by creditors, customers and regulators.
Mechanisms are needed to monitor positions and create
incentives for prudent risk taking by divisions and
individuals.
Nagarajan (2011) in his study of credit risk management
practices for microfinance institutions in Mozambique
found that risk management is a dynamic process that
could ideally be developed during normal times and tested
at the wake of risk. The study concluded that financial
institutions needed to minimize risks related losses through
diligent management of portfolio and cash-flow by
building robust institutional infrastructure with skilled
human resources and inculcating client discipline, through
effective coordination of stakeholders. Matu (2008) carried
out a study on sustainability and profitability of
microfinance institutions and noted that efficiency and
effectiveness were the main challenges facing Kenya on
service delivery. Soke and Yusoff (2009), in their study on
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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
credit risk management strategies of selected financial As presented in Table 1, 97.8% of the respondents
institutions in Malaysia found that majority of financial indicated that their MFIs had adopted credit management
institutions losses stem from outright default due to practices, whereas 2.2 % indicated that their MFIs had not.
inability of customers to meet obligations in relation to From these results it is evident that a significant number of
borrowing. This study will establish whether MFIs MFIs in Baringo County had adopted credit risk
borrowers in Baringo do meet their loan obligation or not. management practices.
Orua (2009) conducted a study on the relationship between
loan applicant appraisal and loan performance of Credit Risk Management Practices and Rate of Loan
microfinance institutions in Kenya. The study revealed that Performance
short-term debt significantly impacted MFI outreach
positively. Long term debt however showed positive The study sought to determine the extent to which credit
relationship with outreach but was not significant with risk management practices have lead to rate of loan
regard to default rates. This study is different since the performance in microfinance institutions in Baringo
focus is exclusively on short term debts. Sindani (2012) in County. The results obtained are presented in Table 2.
her study on effectiveness of credit management system on
loan performance based on empirical review established Table 2: Credit Risk Management Practices and the Rate
that credit terms formulated by microfinance institutions of Loan Performance
affected loan performance. The study recommended that Extent of Effect Frequency Percentage
both credit officers and customers should be involved in Very Great Extent 26 28.9
formulating credit terms. This study is expected to find out Great Extent 48 53.3
if this recommendation was applicable in the case of MFIs Medium Extent 15 16.7
in Baringo County. Least Extent 1 1.1
No Extent 0 0.0
Total 90 100
3. Methodology
The findings presented in Table 2 show that majority
The study employed a descriptive design because such a
(53.3%) of the respondents indicated that credit risk
design allowed simultaneous description of views,
management practices affected loan performance to a great
perceptions and beliefs of the respondents at any single
extent compared to 28.9% of the respondents who pointed
point in time (White, 2000). This technique was
out that credit risk management practices used in
considered appropriate because it enabled the researcher to
microfinance institutions in Baringo County affected loan
obtain factual information from the respondents. The target
performance to a very great extent. The results also show
population in this study was 7 managers and 88 credit
that 16.7% of the respondents indicated medium extent
officers in MFIs in Baringo County. Census technique was
whereas 1.1 % of the respondents indicated least extent.
used because all branch managers and credit officers were
This implies that credit risk management practices as used
directly targeted in this study. The researcher used the
in most MFIs in Baringo County affected loan
questionnaire in data collection. The questionnaire was
performance to a great extent.
preferred because it was efficient, cheap and easy to be
administered. Data was analyzed Descriptive statistics was
Effects of Indicators of Loan Performance in MFIs in
used to summarize the data through percentages and
Baringo County
frequencies. Tables were used to present the data for ease
of understanding and analysis. Inferential statistics such as
The study sought to ascertain the effects of different
regression and correlation analysis were used to show the
indicators of loan performance in MFIs in Baringo County.
direction and strength of association between the variables.
The respondents were asked to assess the effects of
selected indicators of loan performance in microfinance
4. Results and Discussion institutions in Baringo County. The findings obtained are
presented in Table 3.
Adoption of Credit Management Practices in MFIs in
Baringo County Table 3: Effects of Indicators of Loan Performance in
MFIs in Baringo County
The study sought to ascertain whether credit management Statement N SA A N D SD Mean SDev.
practices were adopted in MFIs in Baringo County. This
It is easy for
was done by asking the respondents to indicate whether customers to get 90 37 41 6 6 0 4.22 0.32
credit risk management practices had been adopted in their loans in your MFI
MFIs or not and the results obtained are presented in Table Your MFI incurs
1. a lot of costs in
recovering loans 90 8 29 25 22 6 3.12 0.89
Table 1: Adoption of Credit Management Practices in given to
MFIs customers
Response Frequency Percentage In cases of failure
Yes 88 97.8 to pay the loan
No 2 2.2 the MFI takes 90 35 49 3 2 1 4.50 0.46
Total 90 100 measures to
recover it

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Impact Factor (2012): 3.358
Loan products The findings show that 48.9% of the respondents indicated
have increased that MFIs in Baringo County used client appraisal as a
the MFI’s 90 40 38 7 4 1 4.26 0.35 credit risk management practice to a great extent while
profitability 40.0% indicated that client appraisal was used to a very
levels.
great extent. The results also show that 10% of the
The degree of
risks associated
respondents pointed out that MFIs in Baringo County used
90 8 27 18 27 10 3.00 1.03 client appraisal as a credit risk management practice to a
with loans in your
MFI is high. medium extent while only 1.1% cited least extent use of
credit risk management practices in MFIs in Baringo
From the findings, 78 of the respondents agreed that it was County. This implies that most MFIs used client appraisal
easy for customers to get loans in MFIs in Baringo County as a credit management to a great extent.
compared to 6 who disagreed. The mean response rate of
4.22 with a standard deviation of 0.32 indicates that easy Effects of Indicators of use of Client Appraisal in MFIs
accessibility of loan influenced loan performance in MFIs
in Baringo County. Concerning whether MFIs incurred a The study examined the effects of various indicators of use
lot of costs in recovering loans given to customers 37 of of client appraisal in MFIs in Baringo County. This was
the respondents agreed compared to 28 who disagreed. A done by asking the respondents whether they agreed or
mean response of 3.12 shows that the respondents slightly disagreed with the statements relating to the indicators of
agreed that MFIs incurred costs when recovering loans client appraisal in MFIs. The levels of measurements of
advanced to them. However a standard deviation of 0.89 the indicators were Strongly Disagree, Disagree, Neutral,
suggests that the respondents were varied in their Agree and Strongly Agree. The findings obtained are
responses. Similarly higher percentages were reported in presented in Table 5.
regard to whether in cases of failure to pay the loan the
MFI takes measures to recover it. For instance 84 of the Table 5: Level of Agreement on Client Appraisal in MFIs
respondents agreed that in cases of failure to pay the loan Statements N SA A N D SD Mean SDev
the MFI takes measures to recover it as compared to 3 who Client appraisal is
disagreed. This is also supported by the mean response of a good strategy for
4.50 with a standard deviation of 0.46. The findings also 90 60 28 1 1 0 4.52 0.21
credit risk
show that 78 of the respondents noted that loan products management
had increased the MFIs’ profitability levels as compared to There are
5 who disagreed and 7 who were undecided. A mean of competent
4.26 suggests that the respondents were in high agreement personnel for 90 34 47 3 3 2 4.17 0.33
with low variation in their responses as shown by a carrying out client
appraisal
standard deviation of 0.46. In regard to whether the degree
Client appraisal
of risks associated with loans in the MFI was high, 35 of
considers the
the respondents agreed that the degree of risks associated character of the 90 34 39 7 7 2 4.02 0.37
with loans in MFI was high compared to 37 who disagreed customers seeking
and 18 who were undecided. The mean response of 3.00 credit facilities
showed that the respondents were indifferent in their Aspects of
response. However, a standard deviation of 1.003 indicated collateral are
90 48 39 4 0 0 4.53 0.28
a high variation in their response. These findings seem to considered while
concur with Kibet (2008) who concluded that credit risk appraising clients
management practices played a role in enhancing loan Failure to assess
performance in financial institutions and recommended customers capacity
90 47 28 6 6 2 4.21 0.42
to repay results in
enhanced effectiveness credit risk management practices in loan defaults
promoting loan performance in the financial institutions.
From the findings, it is evident that 88 of the respondents
Extent of Use of Client Appraisal as a Credit Risk
agreed that client appraisal was a good strategy for credit
Management Practice
management as compared to 2 respondents who disagreed.
A mean response of 4.52 indicated that the respondents
The respondents were required to indicate the extent to
strongly agreed that appraisal was a good strategy for
which client appraisal had been used as a credit risk
credit management. Similarly a standard deviation of 0.21
management practice in MFIs in Baringo County. The
suggested a low variation in response. In regard to whether
findings are presented in Table 4.
there are competent personnel for carrying out client
appraisal, 81 of the respondents agreed compared to 5 who
Table 4: Extent of Use of Client Appraisal
disagreed. The results also show a mean response of 4.17
Extent of Use of Client Appraisal Frequency Percentage
with a standard deviation of 0.33 suggesting low variation
Very Great extent 36 40.0 in response. Moreover 73 respondents agreed that client
Great Extent 44 48.9 appraisal considered the character of the customers seeking
Medium Extent 9 10.0 credit facilities. This was in comparison to 10 of the
Least Extent 1 1.1 respondents who disagreed. A mean of 4.02 indicated that
No Extent 0 0.0
majority of the respondents agreed the character of the
Total 90 100
customers seeking credit facilities was considered. This is
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also supported by a low variation in response as indicated
by standard deviation of 0.37.
Concerning whether collateral was considered while
appraising clients 87 of the respondents agreed compared
to 4 who were undecided. The mean response of 4.53 and
a standard deviation of 0.28 shows that majority of the
respondents strongly agreed that collateral was considered
while appraising clients. Similarly high response rate was
reported in regard to whether failure to assess customers’
capacity to repay loans resulted in loan defaults as
indicated by 75 of the respondents who agreed compared
to 9 who disagreed with a standard deviation of 4.21 and
standard deviation of 0.21. It appears that most of the
respondents agreed more than they disagreed with the
indicators of use of client appraisal in MFIs in Baringo
County. Previous studies have also found out that client
appraisal can be used to enhance loan performance since it
ensures that clients have the willingness and ability to
repay a loan. For instance Abedi (2009) found that MFIs
can use the 5Cs model of credit to evaluate a customer as a
potential borrower in order to increase as loan
performance. The results reported in this study also agree
with the findings in a study by Kamau (2011) which
reported that credit scoring model has successfully been
used to assign credit applicants to good or bad credit risk
classes. In addition, Inkumbi (2009) notes that client
appraisal can help identify whether clients have collateral
trying to access equity capital. Similar conclusions have
been made by Kibet (2013) who pointed out that
evaluation of an individual should involve gathering of
relevant information on the applicant and analyzing the
information to determine credit worthiness and making the
decision to extend credit and to what tune.
H01: There is no statistically significant relationship
between client appraisal and loan performance of
microfinance institutions in Baringo County.
Results presented in Table 4.15 show that there is a
positive relationship between client appraisal and loan
performance (r = 0.591, p < 0.05). Hypothesis states that
client appraisal has no significant influence on loan
performance of microfinance institutions in Baringo
County. The researcher therefore rejected the null
hypothesis and concluded that there is sufficient evidence
at 5% level of significance that client appraisal influences
loan performance in microfinance institutions in Baringo
County. This means that client appraisal enhanced loan
performance. The findings are similar to that of Maiteka
(2010) who found that there existed a strong and positive
relationship between client appraisal and loan performance
in commercial banks. However, the findings are in contrast
to the study findings by Liebesman (2004) who established
negative relationship between client appraisal and loan
performance in SACCOs in Vietnam.
Regression Analysis
This section presents results on the regression analysis of
the relationship between client appraisal, credit controls
and collection policies and loan performance in MFIs in
Baringo County.
Table 6: Model Summary
Model R
R Adjusted R Std. Error of the
Square Square Estimate
1 .837(a) .756 .781 .2867

Correlation Analysis Adjusted R2 is the coefficient of determination which tells

us the variation in the dependent variable due to changes in
Pearson’ correlation analysis was applied to test the the independent variable. From the findings as shown in
relationship between credit risk management practices and Table 4.16 the value of adjusted R squared was 0.781, an
loan performance (LP) in microfinance institutions in indication that there was variation of 78.1% on loan
Baringo County. The dimension of credit risk management performance of MFIs in Baringo County due to changes in
practices examined was client appraisal (CA). The client appraisal, credit risk control and collection. R is the
relationship was established through Pearson correlation correlation coefficient which shows the relationship
analysis as presented in Table 6. between the study variables. From the findings shown in
Table 6, there was a strong positive relationship between
Table 6: Pearson’s Correlation Analysis the study variables as shown by R= 0.837.
CA. Total LP. Total
Score Score Table 7: Coefficients
CA. Total Score Pearson Mode Standardize
1 Unstandardize
Correlation l d F Sig.
d Coefficients
Sig. (2 tailed) 1 Coefficients
90 Std.
Total Score N B Beta
Error
LP. Total Score Pearson 1.13 .04
0.591* 1 Constant .318 .241 .274
Correlation 1 7 9
.000
Sig. (2 tailed) Client
90 90 1.15 .03
N Appraisa .339 .265 .305
1 9
* σ=0.05 (Correlation is significant at 0.05 level (2-tailed) l

The correlation table presents the relationship client
appraisal and loan performance. The hypothesis tested in
stated below.
From the data in table the established regression equation
was: Y = 0.318 + 0.339X1
As shown in the regression equation above, holding client
appraisal, loan performance of MFIs would be 0.318. A

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 International Journal of Science and Research (IJSR)
ISSN (Online): 2319-7064
Impact Factor (2012): 3.358
unit increase in client appraisal led to an increase in loan
performance of MFIs in Baringo County by a factor of
0.339. In the computation of the coefficients the p-values
were less that 0.05 an indication that client appraisal was
statistically significant in influencing loan performance of
MFIs in Baringo County.
5. Conclusion
From the findings, the study found that client appraisal had
effect on loan performance of MFIs in Baringo County.
The study revealed that a unit increase in client appraisal
led to an increase in loan performance in MFIs in Baringo
County indicating that there was a positive association
between client appraisal and loan performance in MFIs in
Baringo County. Thus there was strong positive
relationship between client appraisal and loan performance
of MFIs. Hence, client appraisal significantly influenced
loan performance in MFIs in Baringo County.
6. Recommendations
The study also recommends that there is need for MFIs to
enhance their client appraisal techniques so as to improve
their financial performance. Through client appraisal
techniques, the MFIs will be able to know credit
worthiness of clients and thus reduce non-performing
loans. There is also need for MFIs to enhance their credit
risk control. This may help in decreasing loan default
levels. This may help in improving their financial
performance.
7. Areas for Further Research
The study sought to determine the effect of credit risk
management practices on the loan performance of
Microfinance Institutions in Baringo County. Further
research is recommended on the effect of client appraisal
on loan performance in banks in Baringo County. Further
research should also be done on the relationship between
credit risk management practices and nonperforming loans
of SACCOs in Baringo County and on the reasons for loan
default in SACCOs in Kenya from the financial
institution’s perspective.
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